USDJPY the focus for the week
While last week was very much focused on an European Central Bank eager for time to help the efficacy of its monetary policy on the Eurozone economy, this week is all about the Federal Reserve and the Bank of Japan; two central banks who could not be at further ends of the policy spectrum from each other.
Fed to ease off on dovish language
Wednesday’s Fed meeting is set to disappoint those in the investment community who are looking for an immediate rebound in the value of the dollar following a poor month. First of all we must say that we are 100% with the consensus that the Federal Reserve is not going to alter policy at all this week and I am yet to see a prediction away from that. The compromise that those on either side of the policy divide within the FOMC is such that while members may be happier to say that the risks to the downside for the US economy have lessened since last month, that risks remain and that ‘balance’ is so far proving illusive.
We are USD bulls through the remainder of the year. It is our thought that the next 8 months will provide ample opportunity for the dollar to strengthen. In the meantime we have to think that the range trading and bumbling around will continue until a wider pick up in US data manifests itself. We think that this is likely as we move into Q3.
Policy could once again be weakened in Japan
For Japanese policymakers, the question is similar but the means very different. There is a decent opportunity that the Bank of Japan heightens it policy offering by increasing asset purchases within Japanese funds or bonds but we believe another rate cut into negative territory is unlikely at the moment.
The Bank of Japan have made many calls about “carefully monitoring exchange rate appreciation” and indeed, a cut in interest rates may allow for a move higher in crosses like USDJPY but we have to remain concerned about just how durable that JPY weakness could be. You have to bear in mind of course the 12% rally in the yen since monetary authorities imposed negative rates, such as they are, in Japan.
The Fed announces policy on Wednesday evening with the Bank of Japan meeting taking place early Thursday morning. We also have policy announcements from the central banks of Brazil and Russia this week.
UK GDP could be half speed of Q4
Wednesday will also be the focus for sterling this week with the announcement of the preliminary GDP figure for Q1 which in all likelihood will show a slowing economy from Q4. This is a quiet data week for sterling and therefore a lot of the ‘movement’ within the pound should largely come from Referendum news or elsewhere. In the grand scheme of things, we believe that the GDP announcement will see a print of 0.3% compared to 0.6% in Q4 and sterling will run lower as a result. Support may be forthcoming from opinion polls should the Remain camp lead be maintained or strengthened.
The Day Ahead
Today’s German IFO may provide a backbone for the euro although help is forthcoming already from a rather beleaguered euro and sterling. Elsewhere the data calendar is quiet.
Have a great day.